Britain''s
Prime Minister Gordon Brown sent ripples through the country''s risk capital industry
on Wednesday 26 September, when he warned that private equity (PE) tax loopholes
would be closed. The
PM was referring to the fact that in Britain, some private equity bosses pay capital
gains tax at the rate of 10 per cent on the profits they make from investments
they have held for at least two years, rather than income tax at the maximum rate
of 40 per cent. The tax breaks were originally introduced to encourage entrepreneurs.
A flaming controversy
erupted in June after CVG Capital chairman Nicholas Ferguson admitted before a
cross-party committee of British MPs that, as a result, cash-rich equity executives
paid lower rates of income tax than even the cleaners who are the lowest-paid
employees of PE firms! From
2008, Brown abolished the 10 per cent rate, formerly the lowest rate of income
tax for low-wage earners, so all UK taxpayers will be charged at either 20 per
cent or 40 per cent from next April. On the other hand, many PE executives pay
as little as 5 per cent tax after they have written-off loss-making investments
against tax. Unions accuse the firms of profiteering at the expense of workers''
jobs, pensions and benefits. Nowadays,
the prime minister''s every word is carefully examined for hints he may call an
early general election this fall. So, the PM may have been playing to the gallery
of his Labour Party faithful when he told a Labour Party conference audience:
"Whenever there is a loophole that shouldn''t exist, we take action,"
in response to a question by a trade union delegate about the low rates of tax
paid by private equity executives and directors of private equity-owned companies.
"Since
1997, we have closed a massive number [of loopholes]," Brown continued. "Sometimes
it is very difficult, because you have lawyers and accountants who are always
trying to find these loopholes. But on this issue of private equity, I can assure
you we will do so," he emphatically concluded. But
any such move would be a reversal of Labour''s previous position. As recently as
June, Chancellor of the Exchequer Alistair Darling ruled out any "knee-jerk"
tax increases after trade unions and Labour MPs strongly criticised the tax provisions
for private equity. He warned then that this could potentially damage London''s
finance industry, which is responsible for a major chunk of Britain''s economic
growth. Treasury
officials have, however, confirmed that two reviews are underway: one into the
rules on shareholder loans offered by private equity firms as part of their equity
investments in portfolio companies, and the other into general issues of remuneration
and taxation of private equity officials and portfolio company managers. Announcements
are expected only after the pre-budget report is released in October. But
industry players believe the battle is far from lost. They say Brown''s words do
not portend an immediate change in the tax rules. British Venture Capital and
Private Equity Association (BVCA) chairman Wol Kolade, managing partner at Isis
Equity Partners, told an international private equity conference later on Wednesday
that the industry generated £26 billion ($53 billion) in taxes for the UK
government and benefited millions of retired people through the high rates of
return it produced for pension fund investors. "To
say that the private equity industry does not bring benefits to the wider economy
is simply not a serious argument," Kolade said. The industry position is
that the co-investment amounts required to be able to carry interest are very
high, and represent a substantial level of risk, which is why it should be treated
as capital, rather than income. The
BVCA announced that it would be very concerned if anything happened that would
affect the British competitive position at such a time of uncertainty in the world''s
financial markets. On its part, the Unite union warned the government not to backtrack
on its pledge ahead of the pre-budget report next month, when a review is due
to be published into the tax loopholes enjoyed by private equity companies. Private
equity firms have consistently warned that any changes to their tax treatment
would damage the industry and lead to a flood of businesses moving to lower tax
jurisdictions. A representative for private equity firm 3i said some large firms
could quit Britain if they faced a harsher tax regime; the number of deals would
decline, hitting one of Britain''s flagship industries, which has driven growth
in the economy in recent years. The
private equity industry worldwide is fighting criticism of its low tax regimes
and is seeking to restore its image as a responsible investor that preserves jobs
and strengthens local companies. On Wednesday, the European Venture Capital Association
(EVCA) sent the draft of a new proposed Code of Ethics to its stakeholders
including unions, academics, investors, regulators and politicians for
amendment, comment and suggestions, before it can be finalised.
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